MENA Autos Production: Morocco Remains The Clear Outperformer

Key View: The MENA region's overall Autos Production RRI score weakened to 36.7 out of a possible 100, down from 37.9 previously, which makes it the second lowest ranking region globally. The MENA region's score only outperforms that of Sub-Saharan Africa, which scores 33.6 out of a possible 100. This overall weakness is primarily attributed to the region's high risk operating environment, scoring 20.2 and 33.4 out of a possible 100 for its Country Risk and Industry Risk pillars respectively. We believe that the region holds quite strong growth potential for automakers, highlighted by its Reward pillar outperforming its Risk pillar on our Autos Production RRI. However, it will require the region's political and economic environments to improve.

The Middle East and North Africa (MENA) region's overall Autos Production Risk/Reward Index (RRI) score weakened to 36.7 out of a possible 100, down from 37.9 previously, which makes it the second lowest ranking region globally. The MENA region's score only outperforms that of Sub-Saharan Africa, which scores 33.6 out of a possible 100. This overall weakness is primarily attributed to the regions high risk operating environment, scoring 20.2 and 33.4 out of a possible 100 for its Country Risk and Industry Risk pillars respectively.

The MENA region presents a high risk operating environment for automakers, which is highlighted by the region's score of 13.8 for the long-term economic risk index category and 22.3 for the long-term political risk index category, which indicates that automakers will struggle to develop long-term strategies for producing vehicles in the region.

That said, the region boasts relatively attractive rewards, scoring 43.3 out of a possible 100 for the Rewards pillar, just under the global average of 50.0. This is due to strong performance under the average wages/labour costs and vehicle production growth categories, scoring 72.3 and 67.4 respectively. The region's performance under the vehicle production growth category stems from the recovering Egyptian automotive manufacturing industry, and the strong growth in both Algeria and Morocco's automotive production industry. Furthermore, the MENA region benefits from it becoming an increasingly attractive investment destination, especially as countries such as Turkey, which has historically been a prominent supplier of vehicles to Europe, continue to deteriorate as automotive investment destinations.

Morocco ranks first in the MENA region due to its good Risk/Reward balance (Risks = 46.9; Rewards = 47.9) and due to its globally outperforming scores for the vehicle production growth, vehicle production volume and average wages/labour costs categories (scoring 96.4, 64.3 and 69.6 respectively) in our Autos Production RRI. This highlights the country's overall attractiveness for automakers looking for a low cost alternative production base for their increasingly profitability strained production operations in Europe.

We highlight Iran's increasingly risky operating environment, scoring only 22.4 under the Risk pillar of our Autos Production RRI, which despite offering good reward potential (41.6) fails to find a good balance, resulting in an overall score of 33.9, which places it in 45th place globally out of the 57 countries that we cover in our RRI. This is largely due to the re-imposition of the US sanctions which saw most of the foreign automakers cut their losses and abandon their investment in the country. As such, it only manages a score of 19.6 under the vehicle production growth category. Furthermore, its very poor scored under the long-term economic risk index and short-term economic risk index categories (scoring 7.1 and 1.8 out of a possible 100 respectively) further drives down the country's overall attractiveness to automakers looking to benefit from the large growth potential in the country.

We believe that the MENA region holds quite strong growth potential for automakers, highlighted by its Reward pillar outperforming its Risk pillar on our Autos Production RRI, if the region's political and economic environments where to improve. This region scores best on the Rewards side of our RRI with a score of 43.3 out of a possible 100, whereas on the Risks (higher score = lower risk) side it only manages to score 26.8, which gives the region an overall underperforming score of 36.7. The MENA region struggles most under the Country Risk pillar of our RRI, scoring only 20.2 out of a possible 100, which highlights the extensive political and economic risks prevalent in the region. This elevated risk environment makes automakers hesitant when committing to investment decisions in the region, However, Morocco, which boasts the lowest risk operating environment in the region, manages to attract strong investment into its automotive manufacturing industry due to the country's commitment to reducing risks for automakers while keeping the reward potential elevated.

Morocco, which ranks first in the region, scores an overall score of 47.5 out of a possible 100, due to its relatively low risk operating environment, reflected by its score of 46.9 under the Risk pillar of our RRI, and the robust rewards potential for automakers, scoring 47.9 under the Reward pillar of our RRI. Morocco struggles to outperform under the size of labour force and competitive landscape categories, scoring 8.9 and 16.1 respectively out of a possible 100. This highlights the limited labour force that automakers will be able to tap into, which is partly responsible for its weak competitive landscape. That said, automakers can circumvent the labour shortage by increasing the level of automation in its factories or by using the large labour pool in the wider North African region.

Since the re-imposition of US sanctions on Iran, its performance has seen a steady decline on our Autos Production RRI. Iran's overall score went from 46.6 in Q1 2018 to a current low of 33.9 out of a possible 100. This is largely as a result of its Risk score weakening. Our Country Risk analysts believe that Iran's economy will be weakened by the re-imposition of US sanctions from H218, which will hit the country's oil exports and investment inflows. This will primarily increase the short-term economic risk, highlighted by Iran's short-term economic risk index score weakening substantially from 31.3 to its new low of 1.8 this quarter.

That said, the country still presents significant rewards for automakers willing to wait out this tumultuous period. This is reflected by its Country Rewards pillar's score of 48.7, which outperforms the regional average of 35.9. This is due to Iran's low labour cost, reliable supply of electricity and a strong manufacturing capacity. That said, we believe that in 2019 Iran's automotive sector will face its toughest trial yet as the industry's weak points are tested to its limits. Since the re-imposition of US sanctions on August 6 2018, the Iranian automotive sector has remained relatively resilient as the domestic demand for vehicles and its stockpile of automotive components kept it buoyant (see 'US Sanctions Re-Imposed: Scenarios & Implications For The Iranian Economy', July 14 2018). However, this resilience will not last as the ineffectiveness of the government's forex policy for the automotive sector further weakens the industry's ability to survive the upcoming turbulent times (see '2019 To Be A Tough Trial For Iran's Automotive Sector', September 11 2018).

The MENA region will continue to be plagued by high Country Risks as the region's automotive production countries face significant economic and political risks, which drive up the operational risks that automakers will have to contend with. All four of the categories under the Country Risks pillar (namely long-, short-term economic and political risk indices as well as the operational risk index) significantly underperform the global average (see chart below). Iran's significant underperformance under the Country Risk pillars' categories of our RRI highlights a significant barrier that the region faces in attracting automotive-related investments. This is especially problematic in the current global automotive market as automakers increasingly seek to reduce risk, cut cost and streamline production lines which makes them less likely to undertake unnecessary risk, such as establishing vehicle production operations in a high risk environment.